Prices, Production, and Inventories over the Automotive Model Year
Adam Copeland, Wendy Dunn, and George Hall 2005-25

Abstract:&nbspThis paper studies the within-model-year pricing and production of new automobiles. Using new
monthly data on U.S. transaction prices, we document that for the typical new vehicle, prices typically
fall over the model year at a 9.2 percent annual rate. Concurrently, both sales and inventories
are hump shaped. To explain these time series, we formulate a market equilibrium model for new
automobiles in which inventory and pricing decisions are made simultaneously. On the demand side,
we use micro-level data to estimate time-varying aggregate demand curves for each vehicle. On the
supply side, we solve a dynamic programming model of an automaker that, while able to produce
only one vintage of a product at a time, may accumulate inventories and consequently sell multiple
vintages of the same product simultaneously. The profit maximizing pricing and production strategies
under a build-to-stock inventory policy imply declining prices and hump-shaped sales and inventories
of the magnitudes observed in the data. Further, roughly half of the price decline is driven by inventory
control considerations, as opposed to decreasing demand.